DraftKings Will Pay ESPN $250 Million for Ads Over the Next Two Years

A month ago, fantasy sports site DraftKings was set to take on a massive, $250 million investment from Disney in its quest to compete with rival and industry leader FanDuel. The deal had been approved by Disney executives, and all that was left was to finalize the paperwork.

As part of that deal, DraftKings had agreed to commit $500 million in advertising spend with Disney-owned ESPN properties beginning this summer. It was a huge commitment for a company that had raised just $41 million in funding and brought in just $30 million in revenue last year.

But when the investment fell through, the ad deal was restructured. As part of the new deal, DraftKings is now committing a little more than $250 million in ad spend over the next two years, with an option for a third year, according to sources. That deal has already started, but beginning in 2016 it will be exclusive, meaning FanDuel won’t be able to advertise on ESPN properties.

It’s still a lot of money, especially given that under the initial terms Disney was essentially moving its investment from one pocket and into another. But it’s certainly less cumbersome than the original $500 million commitment.

At the time, it wasn’t clear why Disney bailed on the investment. But Re/code has learned from multiple sources that top Disney executives ultimately got cold feet because of branding concerns. Disney wasn’t willing to stake its nearly century-old, family-friendly reputation on a company that’s building a business on what some would argue is a legalized form of sports gambling.

(DraftKings makes money by letting people bet on fantasy sports competitions, but unlike regular sports betting, it’s allowed in many states because it’s considered a “skill-based” game.)

Spokespeople for DraftKings and Disney declined to comment, but as DraftKings CEO Jason Robins told the New York Times last week, “The way they put it to me is that this is an adult product that doesn’t necessarily fit in with their brand.”

Disney’s sudden reversal created a bit of chaos for DraftKings, which then had to call and convince other investors, including Fox Sports, that its funding was still on track. It’s likely DraftKings has a separate ad spend commitment there, too. That funding round still hasn’t been announced, but will be within the next few weeks, according to sources.

In some ways, Disney’s departure which led to the revised ad deal could benefit DraftKings. The deal isn’t just an exchange of funds. Robins told Re/code last month that the deal includes a “deep integration” between the two companies.

Disney’s decision to bail sheds light on another important aspect of the pay-to-play fantasy sports business. While the concept has been widely adopted by many — millions of paying customers, in fact — Disney’s reluctance to get involved shows that this kind of “gambling” is still out of bounds for some people across the country.

The fantasy games still aren’t legal in all states, including some with professional sports teams like Arizona and Washington. (As a result, teams from those states haven’t signed official partnership deals with DraftKings or FanDuel.)

Those partnerships are one of the main reasons that both DraftKings and FanDuel are raising significant war chests. The two companies are dueling for market share and spending millions on exclusive deals with major sports leagues and teams in the process.